Callahan & Associates Chairman Chip Filson said he questionsa nearly $2 billion reduction in the NCUA's Central LiquidityFacility stock reported in October when U.S. Central Bridge wasliquidated. Filson also posted a blistering Feb. 28 opinion pieceon the Callahan website questioning the NCUA's financialtransparency on the matter.

CLF financial statements as of Sept. 30 posted on the NCUA'swebsite show that the fund had $65 million worth of stock purchasedby regular members and $1.845 billion purchased by agent members,which refers to U.S. Central. October's financial statement showsthe agent member stock reduced to zero.

On U.S. Central's 5310 report, also posted on the NCUA'swebsite, as of Sept. 30, $1.85 billion in CLF stock was reported onthe books, but it too had been reduced to zero as of Oct. 31.

“If we can't get a nanosecond answer on $2 billion worth ofstock's whereabouts, either the NCUA has something big to hide orthey lost the money, which is an even greater issue,” Filsonsaid.

J. Owen Cole, president of the CLF, called the notion that thefunds are missing “silly” and said the NCUA has tried to be astransparent as possible regarding the CLF because the regulatorknows it's a topic of concern to credit unions.

“When we redeemed the stock, it converted from being aninvestment asset to cash, and that was used to satisfy whateverliabilities the estate had,” he said.

Those liabilities weren't borrowings but shares. According toits Sept. 30, 2012, 5310 report, U.S. Central had a little morethan $3 billion on deposit in share accounts, including $2.8billion worth of daily shares. 

NCUA Public Affairs Specialist John Fairbanks provided CreditUnion Times information regarding U.S. Central's liquidation fromthe Asset Management and Assistance Center. He said U.S. CentralBridge was insolvent at the time of liquidation, coming up short by$46 million.

U.S. Central's 5310 reports support that statement. As of Sept.30, the wholesale corporate had $3.02 billion worth of assets,including $1.17 billion in cash, and $1.85 billion in investments,which represents the CLF stock. In addition to the $2.3 million inshares, U.S. Central also reported liabilities of $2.3 million andnegative undivided earnings of $44 million. 

Fairbanks also explained that a $2 billion medium-term note U.S.Central issued in 2010 came due in October 2012. However, CLF stockwas not used to repay that borrowing. Rather, he said, theTemporary Corporate Credit Union Stabilization Fund covered theamount, and U.S. Central's financials were not involved.

A net gain on the TCCUSF's 2012 year-end financials also did notinvolve the redeemed CLF stock. According to Fairbanks, the netgain reported from the asset management estate consisted of $790million in assessment premiums received, a $807 million improvementin estimated future cash flows on corporate legacy assets thatcollateralize the NCUA's guaranteed note program, $85 million inNGN guarantee fees and the $88 million transferred from the NCUSIFto corporate stabilization because the 2012 end-of-year equityratio exceeded 1.3%.

Anticipating the NCUA's answer that the stock was swallowed upin U.S. Central's liquidation, Filson countered that the stock wasCLF equity and should have been kept separate from the U.S. Centralfailure. 

“They say the credit union that funded it no longer exists, butremember, this was done on behalf of credit unions,” he said,referring to the original U.S. Central contribution. 

What was the intent of corporate leaders when they capitalizedthe CLF in 1984? Dick Johnson, former Western Corporate FCU CEO anda U.S. Central board member at the time, recalls the meeting whenthe decision was made that U.S. Central would capitalize the CLF.Johnson said Filson represented the NCUA at that meeting because atthe time he was both director of the regulator's Office ofExaminations and president of the CLF.

Johnson said he remembers the NCUA had failed to convince enoughnatural person credit unions to capitalize the liquidity fund, andsaid the NCUA risked ending up with losing face if it failed because it had worked so hard to create it.

Corporates didn't want to fund the CLF either, Johnson said,because they would be required to contribute capital for all creditunions, whether they were corporate members or not. Johnson said heurged his fellow corporate leaders to send him a telegram voicingtheir opposition and directing him to vote no as a member of theU.S. Central board if the motion came up to join and fund the CLF.He recalled he received about 17 telegrams during the meeting. Hesaid the telegrams helped him craft a compromise that required U.S.Central's corporate members to only provide capital for its membersand required that the funds would be deposited in U.S. Central andnot reinvested to generate income as originally proposed by theNCUA.

U.S. Central effectively dedicated half its 1% capital basemember credit unions had contributed to fund the wholesalecorporate to the CLF.  Half of the stock– a quarter ofU.S. Central's existing capital–was placed on the CLF's books as astock purchase. The other half was retained by U.S. Central but wason call for the NCUA to use at its disposal. Cole and Filson bothsaid the NCUA considered the risk of having to call the other halfof the capital negligible.

However, the creative accounting that set up the capitalizationprevents an easy answer to question of where the stock belongs.U.S. Central used part of its capital to buy stock in the CLF,which turned around and reinvested it back into U.S. Central, amove Cole said effectively self-funded the CLF. An annualadjustment enabled U.S. Central to fund an ever increasing amountof stock to meet industry needs, Cole said.

In 2009, following U.S. Central's March conservatorship,auditors determined that the failed credit union's financial woestriggered a GAAP requirement that the impaired asset be presentedon the CLF's balance sheet as a contra-equity account rather thanan asset. Such an accounting treatment would have reduced CLFequity to zero and eliminated its borrowing ability. In 2009, largecorporates that would have provided the most new money to refundthe CLF were struggling with their own balance sheets asmortgage-backed securities losses mounted. The largest, WesternCorporate FCU, was already in conservatorship. The retailcorporates were in no position to cover U.S. Central's majorityownership position.

So, Cole said the CLF in August 2009 invested U.S. Central'sstock in laddered U.S. Treasury securities that eventually maturedaround October 2012, U.S. Central's expected liquidation date. Thesecurities were deposited back into U.S. Central as cash andprocessed as assets in the liquidation.

However, the transaction created a hole in U.S. Central's books.Cole said between August 2009 and October 2012, U.S. Central fundedits CLF stock with cash.

Cole recalled the shuffle increased the industry's awareness ofthe interconnectedness between U.S. Central and the CLF.

“When that transpired, a lot of people started asking about theCLF,” he said. The NCUA board faced a tall task explaining thefund's complex structure and funding, but Cole said the group alsorealized the importance of keeping people informed about the stepsthe agency had taken in the throes of the financial crisis. TheNCUA set aside a section of its website for the CLF, postingmonthly financial statements and a FAQ page 

“Around that time, Filson and others started paying attentionand opining about what it all meant,” Cole said. “A lot ofinaccurate things were said.”

U.S. Central's liquidation is another point of contention forFilson, who has long contested the NCUA's decision to seizecorporate legacy assets and assess credit unions for expected, andnot real, losses.